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Panelists Unpack CARES Act: Transcript

Posted on Apr. 10, 2020

The third coronavirus stimulus package has significant tax ramifications and will keep policymakers and practitioners alike busy for the foreseeable future. Panelists Alan D. Viard of the American Enterprise Institute and Lisa M. Zarlenga of Steptoe & Johnson LLP joined Martin A. Sullivan of Tax Analysts to explore those impacts on an April 1 webinar, "Taxing Issues: The Stimulus Bill and Its Implications."

Tax Analysts President and CEO Cara Griffith moderated the event, which can be viewed on YouTube. A transcript is below.

 

Cara Griffith: Welcome, everyone. I'm so pleased you've joined us for what I'm sure will be a very stimulating discussion about the tax implications of the recent coronavirus stimulus bill as well as the possibility of additional changes in tax policy in the months ahead.

We have a large audience today of over 3,000 who tuned in from all over the country, and actually all over the world, and we're very happy that you did. I'm also pleased that with today's event, Tax Analysts is officially launching a new series of public discussions that we're calling “Taxing Issues.”

Through this series, we'll bring the tax community together for bipartisan discussions on the future of tax policy with leading policymakers and experts. In future events, we'll discuss not just federal tax policy as we are today, but also state as well as international tax policy.

We plan to hold many of these discussions in person in Washington and New York and other major cities across the U.S. and even abroad. But today, of course, we want to keep everyone safe and abide by the rules and social distancing until we're all free from the threat of the novel coronavirus. So today, as you can see, we're all remote.

As part of the coronavirus crisis, the focus today is on the new stimulus bill. It's only been half a week since the president signed this massive piece of legislation, officially known as the Coronavirus Aid, Relief, and Economic Security Act. And I suspect it will be many weeks before we fully understand the tax implications of this $2 trillion measure. But let's step back for just a moment and reflect on the mind-boggling amount of change that has swept the tax world in recent weeks.

We've seen three stimulus measures enacted to address the economic crisis that we're facing, and the most recent was by far the largest. This most recent measure not only puts money directly in the hands of low- and middle-income consumers to address their needs, it also rewrites some provisions of the 2017 tax law, the Tax Cuts and Jobs Act. And this $2 trillion measure passed both chambers of Congress by unanimous votes.

Now, if you had bet on all of this just a few months ago, I suspect you'd have a lot of money right now. This recent measure probably won't be the last stimulus bill we'll see this year. There's already another being discussed. So to help us sort all of this out, we have three outstanding speakers, and I will introduce them in the order in which they will speak.

I've asked each of them to speak for a few minutes to set the stage. When they're done, we'll go a bit more in depth on a variety of provisions, and then we'll begin a discussion with questions, and we welcome yours. Please send your questions to events@taxanalysts.org and we'll get to as many of them as time permits.

We'll hear first from Marty Sullivan. He's chief economist and contributing editor at Tax Analysts, and I'm sure many of you are familiar with his writings over the years about taxes and the budget. We'll hear next from Alan Viard, resident scholar at the American Enterprise Institute, where he focuses on tax reform and budget issues. And after Alan, we'll hear from Lisa Zarlenga, a partner at Steptoe and coach for the firm's tax practice. She represents public and private companies on federal tax issues with a focus on tax policy. So, Marty, I turn it over to you.

Martin A. Sullivan: Thank you, Cara, and hello, everybody. Let me start with what is, unfortunately, some dismal economic news. Since mid-February, the Standard and Poor's index has declined by 23 percent. That means the value of publicly traded corporations has declined by $9 trillion. Since the middle of February, the Treasury note rate, the 10-year Treasury note rate, has declined from 1.5 to 0.7 percent. The 30-day Treasury bill rate is hovering close to zero and has gone in and out of negative territory. Yes, folks, we have negative interest rates now. The price of oil since mid-February has gone from $50 a barrel to $20 a barrel. And since now the United States is an oil exporting country, that is another problem that we face.

Last week, we got the first weekly unemployment report, and the message was awesome. We had 3.3 million unemployment claims coming in. Tomorrow at 8:30 a.m., we're going to have another report. We expect perhaps another 3 million jobless claims. If that all comes to be, we're talking about an unemployment rate going from 3.5 percent to 7.5 percent. If you look at the statistics from the Department of Labor on occupations, and I just did an informal review and I tried to identify the professions that are most likely to be directly impacted by this virus. If you look at waiters and waitresses and dishwashers, and barbers and bellhops and bartenders, and desk clerks, derrick operators and dental hygienists, well, you could all make a guess about what percentage of these folks are going be unemployed. There's 27 million of them by my informal count. Let's say half of them are unemployed or become unemployed. That's 13.5 million, and that pushes our unemployment rate well above 12 percent. And those are only the folks who are directly impacted.

Now these are all ballpark estimates, but I can give you a feel for what's going on. What do you do in a terrible situation like this? Well, what I did is I pulled out my handy first-year economics textbook, and it tells you [that] you should be spending [and] the government should be spending -- spending like crazy. And indeed that is what is going on. If we could go to the first slide, that'd be helpful. And what you see here are just the joint committee estimates of the tax provisions in law. These are the recovery rebates, payroll tax cuts, the employment credits. They're all in here. And you can see that in the first 6 months, that is before September 30, we're going to have $800 billion of tax relief. And that does not include the administrative action taken by the IRS and Treasury to give us three months postponement of our income taxes that were due on April 15. And then we're going to have another $300 billion shortly thereafter at the end of 2020 and beginning of 2021. We'll talk more about these tax provisions and the non-tax provisions, but now I'm going to hand it over to Alan, who I very much want to hear what his point of view is.

Alan D. Viard: Thanks, Marty. What I'm going to try to do in five minutes or so is really give an overview of the purposes that different provisions of the stimulus package may promote. It's a bit ambitious to do that for an 800-page bill in that timeframe, but let me see if I can hit the highlights. I see five broad purposes that different provisions in the package serve. Many of them serve more than one of those purposes. These are to provide incentives for desirable behavior, to provide stimulus to the economy, to provide liquidity, to increase the degree of income redistribution in the economy, and to provide relief or compensation to people who have specifically been harmed.

Let me go through each of them. There's a few provisions that really have an incentive goal to encourage beneficial behavior during the pandemic. Giving workers paid sick leave encourages them to stay home and to avoid spreading the virus. The incentives for charitable giving in the package, which are not likely to be very effective, are intended to encourage additional giving to charities, who will be facing increased demand and reduced resources during the crisis. The alcohol tax exemption for alcohol that's used to make hand sanitizer obviously has an incentive purpose.

I'll spend most of my time, though, on the other four purposes, which are more closely intertwined with each other. One obvious purpose is to provide old-fashioned Keynesian demand stimulus, which as Marty said, is what the first-year textbook tells you to do. That's why we call this a stimulus package because that is one of its major purposes, although not the only one. The idea of stimulus is just to increase consumption, investment or government purchases or net exports, which assuming that the economy doesn't have the totally flexible prices and wages, will translate into increased GDP and increased employment. And there's a lot of provisions of the package that are intended to provide stimulus. The rebate payments are intended to boost consumer spending. The business changes are intended to boost investment.

The stimulus is provided under unusual conditions, though. We actually don't want or expect the stimulus to work right away. Because of social distancing, we don't really want people to be doing a lot of additional consumption, and we don't expect or desire there to be a lot of additional employment during the social distancing period. But of course, the goal is that as it becomes possible to relax social distancing, the economy will be able to recover more quickly if these demand increasing measures are in place. It does mean, for example, that if the only purpose of the rebates was to provide demand stimulus, it might not be that vital to get them out right away. But actually, they serve other purposes, which do make speed important.

The next purpose is to provide liquidity to households and to businesses alike. There's certainly many provisions in the package that does that. It delays payroll tax payments and tax payments have been delayed administratively separate from the stimulus package. Businesses are being allowed to claim net operating loss deductions and AMT credits more rapidly than they otherwise would have been allowed to do. The purpose of liquidity is just to ensure that households are able to meet vital consumer needs that they could afford on a longer-term basis, even if they wouldn't otherwise have the immediate cash, and that businesses could make long-term profitable investments, even if their cash flow is temporarily restricted. This is only one of the purposes going on, though. I mean, the rebates obviously provide liquidity that I think will be vital to a number of disadvantaged and vulnerable households. Of course, if the only goal was liquidity, you could have restructured the rebates as loans that would have to be repaid. That was not done, of course, because they serve a different purpose in addition to liquidity, which is to increase redistribution, or to reduce economic inequality during these hard times.

During hard times, government typically does increase the degree of redistribution. The modern welfare state certainly got a big boost during the Great Depression. I think there's a broad consensus among Americans and people in other countries that when overall resources shrink in society that there should be protection for those who are the most vulnerable, those who have the fewest resources. We may not worry as much about inequality when it's rising, it becomes a priority when the tide is receding. And obviously, many of the provisions in here, such as the rebates, such as the expansion of unemployment benefits, do serve redistributed goals.

Also, some types of redistribution may be less costly during a crisis like this. We often worry, for example, the unemployment compensation could discourage some people from looking diligently for work. Whether or not that is a big concern in normal times, it's really less of a concern now when there's not many jobs to find and when social distancing makes many of those jobs undesirable anyway. The redistribution also usually tends to provide stimulus, so again there's a link back to that earlier purpose.

Then, finally, there's another goal that some people might lump together with the redistribution, but I think it's distinct. That is to provide relief, or, if you prefer, compensation, to the people whose losses are specifically attributable to the crisis. Now that will generally tend to reduce economic inequality, but it's really separate from it. It's not a desire to help people who are not well off in general, but instead those who have specifically suffered from this crisis. Some of the loans that go to the airline and hotel industries, obviously, it's an attempt to help the people in those industries. The suspension of the aviation tax for the rest of the year is another way to help the airline industry. The unemployment compensation benefits really fall into this as well, because most of the people who are out of work now it's likely to be attributable to the to the crisis. The payroll retention tax credit, much of the benefits of which should flow through to workers in those industries. Again, it's intended to help the people who otherwise would suffer harm from this crisis.

There's a lot of interesting philosophical questions about that. For example, industries often experience declines in demand, and the shareholders in those industries suffer losses, which we don't normally think there should be any compensation for, because that's basically accepted. Even the workers in such industries usually have to turn to the general tax transfer system instead of getting some special help. That's true, even though those circumstances hitting their industry are not anybody's fault in the industry. So it's an interesting question of whether things should be treated differently during this pandemic. Some people would argue so because many of these losses were caused by government policies that forced industries to stop operating. And so perhaps compensation is due. I'm not here to answer those questions or really any special expertise in doing so, but I pose them for everyone's consideration. All these purposes are important, and all of them I think will also be important in future as we think about any possible additional stimulus package. All right, I think I will now turn this over to Lisa for some further comments.

Lisa M. Zarlenga: Thank you, Alan. I'm just going to give a few remarks about the practitioners' perspective. For those of you who thought we were seeing the light at the end of the tunnel with respect to the implementation of the Tax Cuts and Jobs Act, as the government had indicated, they were going to try to get all the major guidance out by October 1, well, we're in for a bumpy ride now. We have new legislation that now needs to be implemented as well as a potential delay of the rest of the TCJA guidance. Practitioners now are trying to parse through the various technical provisions that are in these bills and trying to figure out how those might apply to their clients. There are a lot of practical questions regarding how or when to claim these benefits. The IRS has, fortunately, been very responsive. They've put out new guidance almost daily on these various provisions. The guidance has been piecemeal, and so it's a little hard to keep track of, but helpfully, the IRS has a central website with links to all of these guidance pieces. There are notices, there's FAQs, there's press releases, there's just web pages, and you can find all of that at www.irs.gov/coronavirus. It's the collection of all the guidance, which is very helpful.

More guidance will be needed once the IRS gets past the immediate concerns of the tax filing season and getting these rebate payments out to individuals in the first quarter of employment tax filings. There are going to be remaining questions about implementation of the other provisions. There are a number of questions, for example, about how these provisions in the legislation interact with one another and interact with other tax provisions. For example, the NOL carryback interest deduction limitation provisions that are in this legislation will interact with a lot of other code provisions that rely on the computation of taxable income as either a limit or a starting point. In particular, a lot of the international provisions that were enacted by the Tax Cuts and Jobs Act.

We're also getting a number of questions about how the tax benefits in the legislation interact with some of the loan permissions that are in the legislation. While you thought maybe you were a tax lawyer, you're having to get up to speed a little bit on these SBA loan provisions and the other loan provision that are in the legislation. We will discuss today some of those interactions and how they might affect you and your clients. But similar to what we told clients after the enactment of the TCJA, it's going to be extremely important to model these provisions out to try to figure out what best to take advantage of. It may not, in all cases, be the most advantageous to take advantage of the NOL carryback provision, for example, depending upon how it interacts with your other tax situations.

We expect guidance to continue to come out from Treasury and the IRS. As I mentioned, this could very well delay the guidance they were working on for implementation of the TCJA. I think practitioners are just going to have to sort of be flexible and learn this as it comes out. With that, I think I will turn it back to Marty to give a little bit of an overview about what's in the legislation.

Sullivan: Thank you, Lisa. And you're exactly right. We can't just be tax experts. We've got to be able to see the whole package. Let's look at slide number two, please. Let's leave it up there. This is drawn to scale, so this gives you an idea of what the moving parts are. I've divided up the coronavirus legislation into nine parts. The green parts are tax, and the orange/yellow parts are not tax. The five big tax parts are individual income tax cuts — that's mostly those recovery rebates. That's $312 billion. That works out on average to $880 per American, but some people don't get the full amount, such as if you're 18 or you're over $100,000 in income. We'll talk more about that later.

The little green square is the employment retention tax credit, ERTC, which will come into our vocabulary now. That's scored at $55 billion, and since the maximum benefit from that credit is $5,000 per employee, that works out to about 7 million workers qualifying for that. Then we have the payroll credit for sick and family leave — that was part of the phase two legislation. That is pretty generous. The maximum benefit there is $15,000. When you do the math, that works out to about another 7 million people being eligible for that. Moving further to the right, the payroll tax postponement, which is all the 6.2 percent employer-side payroll taxes, are postponed until 2021 and 2022. That's like a short-term loan from the government. It is not conditional on anything, except a few minor things, which we'll talk about in a minute. And then we have all the business tax cuts and all their complexity, which we'll talk about a little bit more. Those are not conditional on retaining employment.

Now the non-tax things you got to know about, there's the expanded unemployment insurance. Very generous. Unemployment on steroids at $260 billion. The average benefit is going to be something like $8,000. If you work backwards, we're looking at maybe 30 million people qualifying for this unemployment benefit, which implies an unemployment rate of 12 percent. These magnitudes are, for me, mind boggling. Then we have $500 billion of stabilization loans for large businesses. I'm not going to talk about that now. What I really want to focus on is the payroll protection loans because they apply to small businesses, "less than 500 employees." If you maintain your employment levels, the loans are forgiven. So this is a massive, massive benefit. The maximum benefit per employer is $10 million. If the average employee is making $50,000, we're going to have 35 million employees covered under this. Just mind-boggling numbers. When you put this all together, and more than 50 percent of the workforce, according to these calculations, will be directly subsidized by these provisions. So these are enormous effects.

Now, if we could go to the next slide, please. It might be hard to see, but what I'm trying to do here is lay out ... OK. We all know a small business owner: a restaurant, a gymnasium, a hairdresser. What are they going to do? And you're going to see a lot more of this. This is a very unsophisticated version of a decision tree that folks are going to have to start thinking about. So the first thing you see on the left-hand side is do I qualify for a loan? That's the SBA loans. If you maintain your employment levels, the answer is not only do you qualify for the loan, but your loan will be forgiven. That's the first thing you have to consider. The second type of loan is a large business loan, and we'll go through that right now. The third thing to consider is the payroll tax credit for sick and family leave. On this one, you don't really get a choice as an employer. If your employees qualify under labor law, you have to provide them with sick and family leave. But the good news is you'll get a 100 percent tax credit for covering all those required expenses. The third thing you have to consider or take into account is that your payroll taxes are going to be forgiven for a year or two, so that's very good. And then the other big thing is the employee retention tax credit, which provides a maximum benefit of $5,000 per employee. And finally, you get to expanded unemployment insurance.

As many employers now are suffering and distressed over whether or not they're going to lay off employees, they have to look at whether they're going to let employees take unemployment insurance, which is very generous. You're not being inhumane to your employees if they're going to get more than 100 percent of their pay back and unemployment benefits. So looking at layoffs is a very viable alternative. But then you also have to consider whether you might want to use the employee retention tax credit, which gives you a $5,000 subsidy per employee, or separately you want to use the paycheck protection program. So all of a sudden, these small, unsophisticated businesspeople have to deal with these very complicated provisions, which I could barely understand after three days of studying. So this is a major challenge for the tax community to get this information out. I'll hand it off from here to Lisa.

Zarlenga: Thank you. Now we'll start digging into the specific provisions a little bit more, starting with the rebates payable to individuals. The CARES Act provides for recovery rebates up to $1,200 per U.S. taxpayer or $2,400 for joint filers, plus $500 for each child. Those amounts are phased out for higher income individuals starting at $75,000 for singles or $150,000 for joint filers, or $112,500 for heads of households. The mechanism for paying these rebates is through an advance refundable tax credit.

Basically, the credits are available or the rebates available, even if the taxpayer has no income, so would otherwise not be filing an income tax return. The IRS has announced in a press release IR 2020-61 that in order to obtain the rebates, no action is generally required. If the taxpayer has filed his or her 2019 tax return, the IRS is going to use that information, including the bank routing information that's provided on that. If they have not filed a 2019 tax return, they're going to use the 2018 return. And so, in particular, if the 2018 information is outdated, there's also going to be a mechanism to go online and provide the bank account information to the IRS for deposit of the rebate payments.

The CARES Act exempts the rebates from offsets to pay tax debts owed to other federal agencies or to pay state income tax obligations or unemployment compensation debts. It does not exempt the rebates from past due child support, I believe, but for the most part, it's exempted. We're not going to get into detail on these, but there's also in the individual provisions some benefits for your retirement funds, including a waiver of the additional tax for premature distributions related to coronavirus for amounts not to exceed $100,000 from your plans. And it increases the amount of plan loans you can take from $50,000 to $100,000.

I think now we're going to move on to the payroll tax deferral that is available to employers. Essentially an employer share of Social Security taxes and railroad retirement taxes from March 27 through the remainder of 2020 is deferred and is due 50 percent on December 31, 2021 and the remaining 50 percent on December 31, 2022. As Marty mentioned, this is like an interest-free loan from the government. You get the use of those funds for at least another year — well more than a year and a half to 2.5 years. Even though you're not actually paying those employment taxes, the employers will be treated as having timely made all their deposits. In other words, won't be subject to penalty for failure to make deposits.

One of the things I mentioned at the outset that we're getting a lot of questions on is the interaction with this provision and the SBA loan provisions. The payment protection program loans come with a forgiveness feature, and this section in the tax provisions provides that it will not apply. The deferral of the employment taxes will not apply if the taxpayer has had indebtedness forgiven under that forgiveness of the SBA payment protection loan, or payroll protection loan program. One of the questions that's come up is there's sort of a timing element here. This deferral provision is not disallowed until you've actually had forgiveness. That means you could go and apply for the loan and even anticipate that you're going to get the forgiveness, and the disallowance doesn't kick in until the amounts are actually forgiven. You could sort of have that period where you miss an unemployment tax payment deadline because you're not sure if you're going to get that forgiveness. And then when you finally do get the forgiveness, the question is what is the government going to do there? Are they going to go back and try to claw back those amounts? Or just, you know, impose penalties and interest on the unpaid payroll taxes?

I will note, too, that this provision is a little bit tenuous. I think most of the interactions in the act are to prevent double dipping if they're the same. You're using an SBA loan, for example, to pay payroll. You shouldn't otherwise get credit for that same payroll. But here the loan forgiveness in the SBA provision exclude payroll taxes, so there's not really a double dipping with respect to the payroll taxes. But nonetheless, the statute does disallow this deferral. We are likely going to need some guidance from the government here on how this is going to apply in practice.

I think we're turning to the other business provisions, so I will stay with you. There were a few business provisions that were enacted — not employer related or employment tax-related provisions — but provisions that related to the Tax Cuts and Jobs Act that made some changes in those provisions to try to free up cash flow to businesses. We'll start with the modification of the net operating loss provisions. There were certain changes in the loss provisions that were made by the Tax Cuts and Jobs Act that are being suspended in this act in an effort to allow companies to have a better ability to utilize their net operating losses and to claim refunds.

Specifically, the CARES Act suspends the TCJA's 80 percent of taxable income limit on net operating loss carryovers for three years, so the limit would not apply to tax years beginning in 2018, 2019, or 2020. And then they allow NOLs that arise in those years —2018 through 2020 —to be carried back five years. Not only does this give rise to liquidity in that taxpayers can obtain immediate refunds for those past years, it could also give rise to a rate benefit in that you're allowing NOLs to offset pre-TCJA income, which was taxed at 35 percent.

The CARES Act also implements certain technical corrections to the TCJA in the loss area. These are all consistent with what Kevin Brady had issued, the draft Technical and Clerical Corrections Act. First, they fixed the effective date, which remedies an error that by making the carryforward and carryback rules effective for NOLs arising in tax years beginning after December 31, 2017, rather than tax years ending after that date. This was a particular problem for fiscal year filers that had tax years straddling January 1, 2018, because now those losses can be carried back to the preceding two years, whereas they couldn't before.

The CARES Act also changes the ordering of certain pre- and post-TCJA losses and how those are used to offset income. As explained in the Joint Committee on Taxation's blue book, Congress's intent was basically to limit the deduction to the pre-TCJA NOLs, plus 80 percent of the taxable income that's computed before any NOL deduction that's attributable to the post-TCJA NOLs, but is also reduced by the pre-TCJA NOL carryovers. Basically, that is less favorable than what taxpayers were hoping for. They were actually hoping that it would not be reduced by the pre-TCJA carryovers. Basically, it results in less amount that you can offset going forward.

The TCJA limited several deductions based on taxable income throughout the act but didn't specify how those multiple deductions will be calculated. And so the IRS and Treasury were left to try to do that by regulation. The CARES Act addressed the interactions with section 172, the NOL provision, by clarifying that the post-TCJA NOLs are computed based on taxable income without regard to the 199A business income deduction and the section 250 deductions for GILTI and FDII. That effectively will force taxpayers to soak up valuable NOLs before they get the 199A and 250 deductions that could result in a lower rate pay on income, so that's less favorable from a taxpayer perspective.

Some of the interactions with the NOL carryback provisions I will just note that taxpayers are kind of struggling with right now are you know ... There's a number of things that are based on taxable income. For example, section 250 — the deduction for GILTI and FDII — is limited to the amount of taxable income, so the carryback of NOLs to 2018 and 2019 could limit the 250 deduction for taxpayers. They're really going to have to look at how those provisions interact and model them out before deciding what to do about carrybacks because carrybacks can be waived.

Also, you might risk losing foreign tax credits. If an NOL carryback results in the loss of the foreign tax credit, for example in the earlier year, it would be freed up and carried forward. But foreign tax credits could only be carried forward 10 years, and so you might not ultimately be able to use all your foreign tax credits. There are also some changes made to the loss provisions for passthrough entities. The CARES Act suspends limitation on excess farm losses and the use of passthrough business losses against non-business income for three years so that the limits now don't apply to tax years beginning in 2018, 2019, or 2020. There's also some technical corrections with respect to those provisions as well.

One of the issues that has come up is that partnerships generally can't file amended returns as a result of the BBA's centralized partnership audit regime. Instead, they have to file administrative adjustment requests, and so partnerships may be more limited in their ability to obtain refunds. Again, guidance is probably going to be looked at, you know, by the government to provide relief here. I'm going to turn over to Alan to make any remarks about the loss provisions in the CARES Act.

Viard: Thanks, Lisa. Just a few quick comments. One of the purposes of giving the loss relief, of course, is to provide liquidity, as I mentioned earlier. But there's actually a good tax policy reason from a long-term perspective as well. In general, we want firm businesses to get immediate tax relief for losses if the losses are genuine. Because after all, they do immediately pay tax on any profits they earn. So, for risky investment, you want parity between gains and losses. The government shouldn't be able to play "heads I win, tails you lose." Now we put some restrictions on losses because we know some of them may be spurious losses from things like tax shelters and hobby losses and such not. But the TCJA really put in unduly restrictive, arbitrarily restrictive limits, which should be relaxed as a general matter.

It's especially important to relax them during a downturn like this, partly to provide liquidity, but also because there's likely to be a lot more genuine losses during this type of economy. And so we're not as concerned anymore about the possibility of spurious losses being a big part of it. So, in other words, the fact that we have relaxed these limits during this recession is good just because it tells businesses that we're likely to continue that pattern, in future downturns, of relaxing the limits. That then gives businesses more of an incentive to engage in risky investments, knowing there will be loss relief if the economy goes into a downturn. Now, it actually might make sense for that type of policy to be implemented on automatic basis, keyed economic indicators, rather than Congress having to do it separately with each downturn. But nevertheless, the principle is important that we will be providing tax relief for these losses, which in most cases, are surely quite genuine. So, I go back to Lisa for more discussion of some of the other business provisions.

Zarlenga: Thank you. The next thing I want to talk about a little bit is the modification of the limitation on business interest. The TCJA had limited interest deductions to 30 percent of adjusted taxable income. And the CARES Act would temporarily increase that limitation to 50 percent of adjusted taxable income for tax years beginning in 2019 and 2020. It would also allow taxpayers to elect to use their 2019 adjusted taxable income in lieu of their 2020 adjustable taxable income for purposes of calculating the 2020 limitation. So if, as expected, your income is higher in 2019 than it is in 2020 due to the coronavirus emergency, you'll be able to use that higher income to generate a higher ATI in a higher interest limitation for 2020 then.

There are special rules here for partnerships as well. The partnership interest deduction limitation is still going to be limited to 30 percent of ATI for 2019. However, if a partner gets suspended losses or suspended excess interest expense allocated to them in 2019, then 50 percent of that suspended interest would be treated as freed up in 2020. It's just a different sort of mechanism for the partners and partnerships to take advantage of the increase. I will also note that there are some similar interactions with some of these international provisions and other provisions that relate to taxable income that are also triggered by the more generous interest deduction, because obviously that's going to result in a lower taxable income overall. Alan, you have anything to add about the interest limitation?

Viard: Oh, no.

Zarlenga: OK. And then one other business provisions I wanted to point out was a technical correction regarding qualified improvement property. There was an error in the Tax Cuts and Jobs Act, which basically changed the appreciation period for qualified improvement property. This is property that is generally when restaurants and retail stores and convenience stores do refresher remodels, they are able to write off that improvement property over a number of years. The error in the Tax Cuts and Jobs Act increased that write-off period to 20 years, which then made qualified improvement property ineligible for bonus depreciation, the 100 percent expensing provision in 168(k). Since the TCJA, that industry has been trying hard to get that error fixed. Fortunately, it was fixed in the CARES Act, primarily because this is an industry that is hard hit. As Marty pointed out before there are certain industries that are directly affected by the coronavirus, and these industries happen to almost all be hit by the qualified improvement property limitation. This is going to help the hospitality industry — restaurants, retail, and the like.

I think taxpayers are going to need guidance on how to claim this bonus depreciation, because obviously most of these companies have just been depreciating normally. In fact, taxpayers may have elected out of the 163(j) interest limitation in favor of the longer depreciation period so they could get a higher interest deduction in lieu of the depreciation because they weren't going to get the depreciation anyway. I think these taxpayers are now going to be looking to try to revoke those elections and hopefully the government will be willing to let them do that. Alan, anything to add about the bonus depreciation?

Viard: No.

Zarlenga: OK. Then I think we're going to turn it over to Alan, you're going to cover the sick and family leave.

Viard: Yes, just briefly to make sure we have some time for Q&A. Basically, businesses have this paid leave mandate that's in effect from April 1 through the end of the year. And the law gives us a 100 percent refundable credit for the amount of wages that are paid under that leave. So if the payment was made to the business contemporaneously with the payment they made to their workers, then the paid leave would effectively be unpaid leave from the standpoint of business. No more burdensome than unpaid leave. Of course, the payments are not going to be quite contemporaneous. The goal is to have them come close. Businesses can reduce their payroll tax deposits in anticipation of the credit, and Treasury says that a cash refund can be claimed within a few weeks for any access.

One other thing is the leave requirement applies only to small businesses, those with 499 or fewer employees. Normally of course, we think of regulatory requirements as applied to big businesses and exempting small. We flipped that here. And the reason is because Congress was evidently unwilling to give the big businesses a tax credit. They wanted to reserve that for the small businesses. And then they were reluctant to impose the mandated leave without the tax credit, and so the odd result is that small businesses get the mandate and the offsetting credit, while large businesses are spared or left out of both. Of course, many large businesses do provide paid leave generally similar to this, although not all of them do so. Marty, I think, is now going to discuss the employee retention credit.

Sullivan: Yes, briefly. ERTC, employee retention tax credit. It's a refundable credit against payroll tax. It applies to businesses of all sizes, but you've got to be distressed. What does distressed mean? You have to be closed down by the government for the coronavirus or you've had a 50 percent decline in sales. Now, what do you get? You get up to $5,000 for each employee that you keep on board. But there's a little different rule for employers with less than 100 employees and employers with more than 100. If you're less than 100 and you're distressed, as defined under the statute, all your employees that you keep on payroll will qualify for this credit. If you're above 100 employees, there's a condition. That is, these employees must not be providing you with services, that is they're not working. So what "not providing services" means is going to be pretty interesting to figure out, and I don't know how they're going to enforce it. It's just another layer of complexity that you see in these provisions.

Very importantly, and we mentioned it before, this provision interacts directly with the small business loan provision. You get one or the other. Do you want to take the ERTC or do you want to take the SBA loan? Well, in general, rule of thumb, the ERTC is $5,000 per employee. The SBA loan is calibrated to salary, so if you have a lot of employees that are making on average over $24,000, it's going to be more fitful for you to be looking at the small business loan. If you have a lot of low-wage employees, then you're going to want to probably be looking at the ERTC. However, you will also lose your work opportunity tax credit. And they were talking about restaurants a lot. Guess who uses the work opportunity tax credit a lot? Restaurants.

On their own, they're complicated enough. But on top of that, you have to figure out the interactions, and you can't just rely on tax law. We're talking about borrowing provisions. I'll leave it at that, and Cara?

Griffith: Yeah, great. Thank you all. It's incredibly informative and there's a ton of information, a lot more than we can certainly cover. We had a lot of questions come in, but I've got one to start with and it's sort of in the what's next category. There's been so much talk about a phase four stimulus, and so I would be interested in hearing your opinion on that. Does the economy need another shot in the arm? And if so, what form should take? Pelosi has mentioned rolling back the SALT cap. Should that be a part of the phase four? And I would like to hear what you guys think in terms of timing and what might be in it.

Sullivan: I'll take the first pass at it. We don't know what the future holds. A lot of it's wait and see. What we don't want is a lot of partisan politicking where everybody's getting in their favorite provision trying to ride this next bill. I think what would make a lot of sense is to look at all these provisions, which are very complicated, and see which ones work and which ones don't work. There's a lot of infrastructure being built at the IRS and at the unemployment agencies and at the Department of Labor and the Treasury Department to get these programs up and running. We don't need a new program. I think we need to adjust these programs as we move forward. The other major suggestion by the president and many others is maybe we need to start looking at that long-term infrastructure bill now. Interest rates are close to zero, so it's a good time to be borrowing for the long term. That would be my thoughts about this.

Viard: I agree with Marty that we really don't want to try to be developing another package from scratch. And I think everyone listening now must have the realization that this is a very complicated package as it stands, so we don't need another set of complex provisions. The SALT cap I just think it's first of all divisive on partisan grounds. And then there's no clear link to the goals of a stimulus package, so whatever the merits of that issue may be, I think they should be dealt with separately apart from any stimulus package.

Zarlenga: I've seen a difference of opinion between the Republicans and the Democrats on this. I've been hearing more Republican offices say, "Let's wait and see if it's needed." I think the Democrats are more eager to provide more stimulus, particularly to lower income people. There are also a lot of industries that might have been affected differently in terms of being able to meet certain tax requirements that might be looking for relief. Some of those industries are going to Treasury and the IRS to try to get that relief. Others may need legislative help. And so I think some of the taxpayers are looking forward to the fourth stimulus package, whatever we end up calling it, to try to get longer term relief. Maybe, you know, increasing the capital to small businesses that may not have been able to benefit from the SBA loans or this first round of stimulus. I think we will start seeing a number of provisions, not huge provisions, but smaller relief that's targeted to either particular industries or particular code provisions.

Griffith: Great. So another question that has come in — we've actually gotten numerous questions on payroll tax, but in particular does the payroll tax deferral apply to all businesses or only to employers designated as a small business? We also got a similar question with the extent to that the payroll protections are available to nonprofits. Can any of you respond to that?

Zarlenga: I can take that. The payroll tax deferral is available to all employers. The amount differs based on whether you have less than 100 employees or more than 100 employees. So even very large employers can take advantage of the payroll tax deferral. It also does apply to nonprofits. It does not apply to governmental entities, though.

Sullivan: Lisa, as you pointed out, if you take the SBA loan, you don't qualify. That correct?

Zarlenga: That's correct. If you take advantage of the forgiveness. You can take an SBA loan, but if you take advantage of the forgiveness, then you can't take advantage of the payroll deferral.

Griffith: Great. So I'm just reading through some questions here. We just got one that says regarding qualified improvement property, the retail glitch fix, do you think Treasury has the authority to treat the technical direction as a change in use? Marty, you're smiling. Would you like to respond to that one?

Sullivan: I don't know. I don't know. I'm sorry.

Zarlenga: I have not thought about that particular issue. I could give it some more thought, but I don't know offhand. I'd have to go back and look at the language of the statute to see what the actual grant of authority is there.

Sullivan: If that individual sent an email, I will get back to them with details.

Griffith: We've got a lot of these. There will be many, many more questions than we can get to. Alan, this question is specifically for you. It says, "What economic/other purpose is served by the suspension of required minimum distribution requirements?"

Viard: That is something I've wondered myself with the [inaudible] provision. It does not fit in readily into any of the provisions that ... any of the purposes that I listed. I'm actually quite baffled by that. It's easy to see why they allowed additional penalty free withdrawals. That's providing liquidity. But, of course, allowing people to make smaller distributions in old age, that gives them additional choice. But it's completely unclear to me how that responds to anything pertaining to the coronavirus situation.

Griffith: Here's a broad question that just came in. Do the panelists have any sense of how effective these provisions might be in shoring up the economy and the small businesses generally? Secondly, do you have a sense of which industries or professions may be more benefited by these provisions?

Viard: I mean, as a general matter, I think that this will provide substantial help. One can argue with whether all of these provisions are as well designed as they could be. But the sheer magnitude of the relief that is being offered suggests that there has to be a significant impact. Whether it's going to be enough, I think, is far from clear, and that again goes back to the uncertainty as to whether there will be another package. In terms of the particular industries, I mean, the other panelists may be better able to speak to that. You've got some provisions that are targeted, like at the hotel and airline industries. Other provisions that are targeted at small businesses, which are obviously more common in some industries than others. But as Marty indicated earlier, there's a pretty broad range of people who are going to be getting some benefits, so I think it's going to be relatively profuse.

Sullivan: I think as I go through it, the biggest problem I see is getting the information out. You have to deal millions of small businesses, and so the money is out there, but they're already firing people, laying people off, or they don't know what to do. And could we tell them ... we could suggest things here, but could we tell them for sure they're going to get 100 percent of their payroll taken care of? Which is the purpose of the SBA loans. So on the one hand, I want to scream out to the small business owners, "Don't lay people off. The government's going to make you whole." But of course, there's a lot of details that go through that. That's the intent. And so I think right now what is needed is to get the information out as quickly as possible. Obviously, the people of Treasury, Department of Labor are working on that. That's part of what we're doing here. But the sooner we get that information out, I think the maximum impact it will have. We have to remember not everybody's as sophisticated as a Fortune 500 company here.

Griffith: Marty, to follow up with that, do you or any of the other panelists have a sense of what we are going to see in guidance both in the short term and in the long term? Is the issuance of guidance in any way going to be affected by the fact that everyone is working from home? Everyone is struggling. We've had shutdowns. We have stay-at- home orders. What can we expect in terms of the guidance that we might see in the next few weeks, the next few months, and in the next year?

Sullivan: You know, after the TCJA, you could drive past the IRS building at 111 Constitution Avenue or the Treasury building at 8 p.m. or 9 p.m. and the lights were on. They were working around the clock. But even still, it took months and months and months to get even basic guidance out. Here, we're talking about getting this guidance out in weeks on some very complicated provisions that are hard. There's a lot of lines that need to be drawn, and folks need to know for certain. Now, I imagine the Treasury Department is going to be very lenient in terms of writing regulations, and the IRS will be lenient in terms of enforcement because we're not here to punish people who make minor mistakes. But again, if you're on the other side, you need this information fast. I just think the demand for the information is very high and the complexity is very high, so the poor folks at Treasury — like Lisa was saying, you thought TCJA was over. And these folks just have to get back into working around the clock and weekends getting this information out and it really, really matters a lot.

Zarlenga: Yeah, I would echo what Marty said. I think what we've been seeing so far is that the IRS and Treasury have been trying to be very responsive getting guidance out. They're continuing to work on additional relief under 7508(a), their authority to extend various deadlines and things like that. Looking at enforcement and what's going on with their audits. I think the folks that are writing the guidance have an easier time doing that remotely than the people who are auditing returns and, you know, on the front line. And so I think we're going to start seeing some choke points where, you know, taxpayers are waiting for claims for refund because they're undergoing an audit. The audits are still happening, but I think we're going to start seeing a lot of slowdowns, administrative slowdowns there, because those people have a lot less ability to work remotely and it's going to take a little bit of startup time to get as an administrative matter, a lot of those people don't have telecommuting capabilities. They have to get permission, they have to get equipment, and all that kind of stuff, and so there's going to be a little bit of a delay in getting that stuff up and running. The guidance machines, the lawyers, and stuff, they can work remotely pretty well, and I think we'll keep seeing them crank out this guidance, you know, on an almost daily basis, at least for the next probably few weeks would be my guess.

Griffith: Well, it looks like our time is now up. I want to thank the panelists for all of the information, all the time that you put into this. We obviously did get a lot more questions than what we could answer today, so we will be going through those questions and try to answer those we can, to put together some additional webinars that are maybe more focused on the specific issues that we see as we go through the trends of all of the questions. We look forward to trying to get out as much information as we can and providing you all with the needed amounts of detailed information right now. So I thank everyone and all the participants for dialing in and joining us today, and we look forward to doing the next one. Have a great day, everyone. Stay safe and healthy

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